Petronas, which has reserves spanning Africa, Southeast Asia and the Middle East, is investing overseas to feed rising demand as output from ageing local fields declines.

"This is a setback, no doubt," Chin said in an interview on the sidelines of an industry event in Singapore. "I would say that any deal of such magnitude is important to Malaysia, especially Petronas as a worldwide operator. It would not deter Petronas from investing in other regions or other sources of energy, wherever Petronas can operate."

The bid had not been expected to hit roadblocks in a review process that asks whether a deal is of "net benefit" to Canada. But, in a sign that it was attracting greater scrutiny, the review period was extended by two weeks earlier this month.

Canada's Industry Minister Christian Paradis said late on Friday that Petronas' bid for Progress - one of the largest owners of exploration lands in the gas-rich Montney shale region in northeastern British Columbia - would not provide the benefit required by Canada's foreign investment laws.

Petronas holds reserves of 6.56 billion barrels of oil equivalent (boe) in overseas assets, comprising nearly a quarter of the company's total, according to its website. The company's total hydrocarbon reserves stand at 27.12 billion boe, with average daily production of 1.1 million boe.

It has exploration and production presence in over 22 countries in Southeast Asia, the Middle East, Central Asia, Latin America and Africa.

"I suppose Petronas as a company will have to look at each area and say whether they can operate in that area, what is the government framework," Chin said. "It was going to be one of the bigger deals Petronas is working at ... it would be a disappointment to Petronas."

Chin declined to say what Malaysia's next course of action would be after Canada rejected the bid. Petronas is going to report back to the prime minister and the issue may be taken up at the next meeting of the nation's oil and gas committee, of which Chin is a member.

The surprise blocking of the Malaysian bid could signal problems for a much larger Chinese deal in Canada's energy sector, with oil group CNOOC's <0883.HK> C$15.1 billion offer for oil producer Nexen outstanding. Rejection of CNOOC's bid would likely damage trade ties Canada has been trying to build with China, underlining political sensitivity to Chinese corporate expansion in North America.

The Canadian government, which has said C$630 billion ($636 billion) in investment is needed in its energy sector over the next decade, has been trying to balance concerns over the deals with that requirement for capital.

Progress CEO Michael Culbert said he was disappointed with the ruling and his company would take the next month to try to determine what concerns led to the rejection. ($1 = 0.9908 Canadian dollars)